OraSure Technologies Inc (OSUR) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to OraSure Technologies 2005 second-quarter financial results conference call and simultaneous webcast. (OPERATOR INSTRUCTIONS). For opening remarks and introductions, I will now turn the call over to Kathy Owens (ph) at OraSure Technologies.

Good afternoon, everyone, and thank you for joining us today. I would like to begin by telling you that OraSure Technologies issued a press release at approximately 4:00 PM Eastern time today regarding our 2005 second-quarter financial results and certain other matters. This call is available real time on our website and will be archived there for seven days. Alternatively you can listen to an archive of this call until midnight August 9, 2005 by calling 800-642-1687 for domestic or 706-645-9291 for international. The access code is 7819208. With us today are Doug Michels, President and Chief Executive Officer, and Ron Spair, Chief Financial Officer. Doug and Ron will begin with opening statements and then follow with a question-and-answer session.

Before I turn the call over to Doug, you should know that today's conference call will include a discussion of certain non-GAAP financial measures. Additional information regarding the most comparable financial measures prepared in accordance with GAAP and a reconsolidation between the non-GAAP and GAAP financial measures is contained in the press release issued today. The press release is available to you on our website at www.OraSure.com or by calling 610-882-1820. If you go through our website, the press release can be accessed by opening the Investor Relations page and clicking on the link for "News Releases."

I must also remind you that this call may contain certain forward-looking statements including statements with respect to revenues, profitability, earnings per share and other financial performance, product development, performance, shipments and markets and regulatory filings and approvals. Actual results could be significantly different. Factors that could affect results are discussed more fully in the SEC filings of OraSure Technologies including its registration statement, its annual report on Form 10-K for the year ended December 31, 2004, its quarterly reports on Form 10-Q and its other SEC filings.

Although forward-looking statements help to provide complete information about future prospects, listeners should keep in mind that forward-looking statements may not be reliable. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after this call.

With that, I would like to turn the call over to Doug Michels.

Thanks, Kathy, and good afternoon, everyone, and welcome to our second-quarter earnings conference call for 2005. We are very happy that you have joined us, and we look forward to updating you on our results and the progress we're making against our plans for 2005.

For this afternoon's call, I will first provide a brief review of the quarter, focusing on our strong financial performance and some of the more noteworthy developments involving our major product lines. Ron Spair, our Chief Financial Officer, will then provide a more detailed review of our financial results for the second quarter and our expectations for the rest of 2005. I will conclude with a brief overview of some of the progress we're making on our long-term strategy, and we will then open the floor for questions.

OraSure's second quarter of 2005 was excellent. The Company recorded record revenues of 17.4 million, a 32% increase over the comparable period in 2004. This increase was driven by significant growth in our infectious disease and substance abuse testing businesses.

We also delivered another very profitable quarter. Net income for the second quarter was $1.4 million, a substantial improvement over the net income of 142,000 experienced in the second quarter of 2004. This bottom line was achieved despite the fact that we also recorded a $1.5 million charge for a reserve established against the value of our existing inventory and fixed assets for our UPLink oral fluid rapid drug detection system. Ron will discuss the reasons for this charge during his overview of the second-quarter financials.

Finally, we enhanced our already strong cash and liquidity position. We had more than $71 million in cash and short-term investments and working capital of almost $75 million as of the end of the second quarter.

Our strong financial performance was once again the result of continued progress in the execution of our business plans and the performance of each of our product lines. Let's start first with a review of the infectious disease business.

Revenue from the infectious disease testing market for the second quarter was up 89% versus 2004, mainly driven by the strong growth in sales of OraQuick ADVANCE. The significant benefits of rapid HIV testing continues to be recognized, and this is helping grow our customer base and increase the utilization of OraQuick in public health, hospitals and new market segments.

Some specifics that we believe are helping to drive sales. The U.S. Preventive Services Task Force recently issued a recommendation in the annals of internal medicine that all pregnant women be screened for HIV as a routine matter. The panel concluded that routine screening would allow pregnant women infected with HIV to be diagnosed so that they could be given drug therapies, have cesarean sections or avoid breast-feeding in order to increase the chances that the virus would not be transmitted to their babies.

At the National AIDS Update Conference held this past June, the CDC presented findings from a recent OraQuick study conducted at Cook County Hospital Emergency Department in Illinois where it concluded that rapid HIV testing may increase the number of newly diagnosed patients and improve entries of care for those who are diagnosed. Significantly of the 82 identified HIV-positive patients in the study referenced by the CDC, 51% had no self-identified risk factors for the disease.

The CDC also recently publicly reported that more than 1 million Americans are now believed to be living with the AIDS virus. While this increase reflects the advances in treatment which allow HIV-infected persons to live longer, the CDC also estimates that 25% of HIV-infected individuals continue to be unaware of their positive HIV status, and it is this 25% who account for 55% of all new HIV infections.

A commission appointed by the New York City Department of Mental Health and Hygiene recently issued a draft report which recommends making HIV testing a routine part of every emergency room visit. The report represents the city's attempt to further stem the spread of HIV by people who unknowingly infect other people.

New York also encourages routine testing in any type of medical setting, including physician office visits as well as emergency room visits. Other states such as Florida have taken steps to make HIV testing more routine for pregnant women by adopting an opt out policy for all pregnant women, ensuring that more women will receive an HIV test. Each of these examples further supports the need for routine HIV screening.

Along these lines, the CDC has announced that it will present a satellite broadcast and webcast entitled "Revised Recommendations for HIV Screening of Adults, Adolescents and Pregnant Women in Health Care Settings" on November 17. This broadcast will cover the rationale for expanding routine HIV screening in health care settings among other things.

All of this data further confirms the need for a versatile HIV test such as OraQuick ADVANCE and we believe will continue to drive increased demand for this product.

Turning to some specifics for the second quarter, our direct sales of OraQuick in the public health market grew 210% over the second quarter of 2004. Much of this can be attributed to the expansion of public health testing programs. Several states saw significant expansion of their testing initiatives including California, Florida, New York, Texas and Maryland, which in total had an increase of 386% over the second quarter of 2004.

The latest bulk order from the CDC received last December for 210,000 units is over 75% deployed. Devices had been distributed to 25 states in Puerto Rico under this program, and we expect this order to be fully deployed by the end of September.

As you know, we also received a $4 million bulk purchase order from the Substance Abuse and Mental Health Services Administration or SAMHSA for the delivery of OraQuick ADVANCE to substance abuse treatment and prevention sites throughout the United States. Deployment of this order is over 50% complete. And under this program devices have been sent to 25 states and a number of larger cities including New York, San Francisco, Chicago and Los Angeles. We have also completed several training seminars for SAMHSA in Texas and Virginia, and we expect training of additional sites to continue over the next few months. We also expect most of the balance of this order to be shipped by the end of this year.

We are also continuing our efforts to obtain a new bulk purchase from the CDC for 2005. With the growing demand for rapid testing and the quicker than expected deployment for the last CDC order, we are hopeful that a new order will be placed shortly.

We continue to see excellent sales growth of OraQuick ADVANCE to hospitals. For example, revenue from sales to Abbot increased 126% compared to 2004. This increase reflects the strong cooperation between our companies, including the work of our hospital team and their support of the Abbott hospital representatives in targeting key hospital accounts for conversion to OraQuick ADVANCE.

Once again, we have experienced a lot of successes in the field which included bringing on some major hospital systems such as the Mayo Clinic and the Cleveland Clinic and closing purchasing agreements with major group purchasing organizations such as the Health Trust Purchasing Group, HPG.

Perhaps the best evidence of the success of our efforts in the United States hospital market is that Abbott recently increased its forecast of purchases through the end of this year. Our new agreement and relationship with Abbott is clearly off to a great start, and we believe it is the right structure to maximize penetration of the U.S. hospital market.

There are now 44 states that have adopted the use of OraQuick ADVANCE in all or in part. Because of current demand for this new product with an oral fluid claim, we remain on track to phase out our HIV-1 product in favor of OraQuick ADVANCE by the end of this month.

As I reported during our first-quarter call, one area of growth involves new customers such as family planning and reproductive health clinics. Because of the opportunity represented by these customers, we formed a new reproductive health group at OraSure which consists of five flextime sales representatives who will be focused on growing sales to this part of the market. This group was officially launched in June and because of its small size has focused its efforts on top regions around the country. Although this group will initially focus on selling OraQuick ADVANCE, it will also be used to expand sales of our Histofreezer Cryosurgery product. We're happy with the preliminary results from this group, and we expect significant progress in the future.

As we previously announced, OraSure celebrated National HIV Testing Day on June 27 by cosponsoring the "Mayors Campaign against HIV" with the National Association of People with AIDS or NAPWA. This was a national campaign to encourage testing for HIV and promote the benefits of knowing one's HIV status.

In partnership with NAPWA, we worked with city public health departments and community-based organizations to elicit mayoral support to urge HIV testing among their constituencies. Major cities participating included New York, Los Angeles, Chicago, Philadelphia, Houston, New Orleans, Cleveland, Phoenix and San Antonio. We donated approximately 10,000 OraQuick ADVANCE tests around the country to support the initiative and received extensive coverage by both national and regional media. We believe these types of events are critical in helping to educate the public on the benefits of HIV testing and knowing one's status.

International sales for OraQuick for the second quarter were $371,000, a 63% increase over the second quarter of 2004. Our discussions have continued with leaders of both the President's Emergency Plan for AIDS Relief or PEPFAR and the Global Fund and Global Business Coalition members to access available funding for the purchase of our OraQuick test for use in developing countries.

To facilitate purchase, OraQuick was added to the WHO list of approved rapid HIV tests during the second quarter. We also will be meeting with American Ambassadors, USA mission directors and health ministers in targeted countries in Africa and Asia to promote the use of rapid oral fluid testing under U.S. bilateral and multilateral assistance efforts.

Moving on to substance abuse and Intercept. Our Intercept lab-based oral fluid drug testing system had another great quarter in the second quarter. Total Intercept revenues were up 75% over 2004, reflecting a 162% increase in workplace testing revenues and a 23% increase in international. The total number of oral fluid specimens processed in all markets for the month of June hit an all-time high of almost 150,000, and we estimate that total specimens processed for the second quarter are up over 50% compared to the second quarter of last year.

Sales of Intercept devices which are predictive of future demand totaled $1.7 million, up 108% in Q2 versus 2004 with work place up 233%, criminal justice up 6%, and international up 21%. Device demand was driven in part by more than 60 new accounts closed in the second quarter.

Sales of Intercept oral fluid drug assays are indicative of the number of oral fluid specimens being processed. Assay sales grew by almost 42% over last year with workplace up 87%, criminal justice up 6% and international up 24%.

One of the larger accounts closed during the quarter was Lowe's, a major home improvement retailer with more than 1100 stores in 48 states. Adding a large employer like Lowe's to the growing list of Intercept customers further illustrates the progress we are making in converting the market from traditional year-end drug testing to oral fluid testing.

At a recent Drug Testing Advisory Board, DTAB, meeting held this past June, several notable oral fluid experts, as well as current customers of Intercept, stepped forward and offered public comment in support of Intercept and oral fluid drug testing before board members and SAMHSA officials. The DTAB board is completing its recommendations on SAMHSA's revised drug testing guidelines, and we are optimistic that the final guidelines will be supportive of oral fluid and our Intercept drug testing system.

Our cryosurgical systems business performed as we expected during the quarter with revenues of 4.3 million, a decline of 12% over 2004. In the over-the-counter market, sales of the Freeze Off product accounted for $2.8 million in revenues, which was in line with our guidance of $3 million for the quarter. Our agreement with Medtech is for North America, and we have been working with Medtech to prepare for the launch of Freeze Off in Canada this fall. The final regulatory hurdles have been cleared, and we expect to begin selling Freeze Off for the Canadian launch in the third quarter.

Sales of our Histofreezer product in the U.S. professional market were slightly lower than 2004, but we expect them to increase over the year primarily due to enhanced sales and marketing efforts. On the European front, professional sales were 14% lower than a year ago.

Finally, our patent infringement litigation against Schering-Plough continues. We recently received a long-awaited Markman decision in this matter. As you may know, the Markman decision essentially sets forth the court's interpretation of key terms and phrases in the patents at issue in the case. Following issuance of the Markman decision, the court also established a new trial schedule, which has a final trial on the merits scheduled to occur in November. We're very happy with the Markman decision, and we remain confident in the strength of our position. We look forward to completing this litigation on the recent schedule adopted by the courts.

Lastly, sales for the insurance risk assessment market for the second quarter were slightly higher than a year ago. This level of revenues confirms our views that this business has stabilized as we predicted at about $2 million per quarter.

In the area of manufacturing and operations, continued growth in all product lines has driven operations to add capacity throughout 2005 resulting in higher utilization of facilities and equipment. New employees were hired and a second shift was added in several manufacturing processes. The automation for the Intercept and OraSure devices has gone very well, and we have hit record production levels for these products. We also set production records for OraQuick using our current semiautomated processes.

We continue to make progress in automating our OraQuick manufacturing process. Last quarter we installed automated equipment here in Bethlehem. We have since issued orders for additional modifications that are needed before we can bring the equipment online. Following completion of these modifications, the equipment will be validated and data supplied to the FDA before we can use it to make OraQuick ADVANCE. We continue to expect these activities to be completed early in 2006. Once this equipment is in use, we expect to further lower our cost for this product while significantly increasing our manufacturing capacity.

And with that, I will turn the call over to Ron Spair who will provide a more detailed review of our second-quarter 2005 financial results.

Thanks, Doug. Total revenues for the second quarter were 17.4 million or 32% higher than the same period in 2004. Product revenues were 17.3 million for the quarter which was also a 32% increase over Q2 of 2004. Both revenue amounts are records for the Company. This is the 10th consecutive quarter of record revenues and the 13th consecutive quarter of increasing revenues.

The revenue increase came primarily from the Company's infectious disease and substance abuse testing product line. In the infectious disease market, we sold $6.3 million worth of OraQuick, which included 879,000 in sales to the CDC, 1.7 million in sales to the Substance Abuse and Mental Health Services Administration, 2.2 million in direct sales to the public health marketplace, $939,000 to Abbott, 371,000 into the international marketplace, and 203,000 of direct sales to hospitals.

OraQuick direct sales to the public health marketplace are up 210% over the comparable 2004 quarter. Sales of the OraSure device in the infectious disease market totaled 1.2 million in the quarter compared to 1.6 million in Q2 of 2004. In the substance abuse testing market, sales were up 48% over Q2 of '04. Total Intercept sales were up 71% over '04 with workplace testing revenues up over 1 million to 1.7 million in the second quarter of 2005. Freeze Off sales were down 15% from the second quarter of last year at 2.8 million, which is slightly less than the 3 million we projected for Q2 of '05. Overall sales to the cryosurgical systems market in Q2 were down about 12% compared to last year. For the third quarter, we expect total cryosurgical systems sales to increase to approximately 5.4 million with 2.8 million in combined domestic and international over-the-counter sales.

Insurance risk assessment sales of 2 million in the quarter were 4% higher than the comparable quarter in 2004. This is in line with our projected base run-rate of approximately 2 million per quarter for this business on a going forward basis. As we look forward, we expect total revenues in the third quarter of 2005 to be in the $17.75 to $18 million range.

Turning to gross margin, as Doug indicated, our second=quarter results reflect the $1.5 million charge for a reserve established against the value of inventory and fixed assets related to the UPLink rapid point-of-care oral fluid drug detection system. As part of our strategic business review completed in late 2004, we concluded that the roadside drugs of abuse testing market for UPLink may not be as attractive as a number of other opportunities.

During the first half of 2005, we explored our options with respect to UPLink including possibly transitioning the manufacturing of the product to Drager. Unfortunately we were not able to reach an agreement with Drager. Additionally Drager has informed us that they will no longer promote the sale of the UPLink system. In light of slower-than-expected sales, difficult channel economics and higher than expected manufacturing cost for this product, both we and Drager concluded that we could not justify additional investment in the UPLink drug test at this time. We, therefore, recorded a reserve against the carrying value of the related assets while we explore whether an alternative outlet for this product exists.

This negatively affected gross margin in the second quarter which came in at 54% compared to 58% in the second quarter of 2004. However, excluding the UPLink charge, gross margin increased to 63% for the quarter, a full 5 points more than one year ago. The adjusted gross margin was positively affected by more efficient utilization of the Company's manufacturing capacity.

Operating expenses for the second quarter increased by 10% or 757,000 to 8.5 million compared to last year. This increase is primarily attributable to increased charges related to amortization of restricted stock grants, increased consulting expenses in sales and marketing, and increased staffing costs in both sales and marketing and general and administrative. These increases were partially offset by lower R&D expenses resulting primarily from lower staffing expenditures.

Our bottom line for the second quarter was very strong as we reported net income of 1.4 million or $0.03 per share. This compares to net income of 142,000 or $0.00 per share reported for the same quarter of last year. Again, excluding the UPLink charge, our second-quarter net income would have been approximately $3 million or $0.06 per share on a basic and fully diluted basis. And for the six month ended June 30, 2005, net income would have been approximately 4.5 million or $0.10 per share on a basic and fully diluted basis.

Because of increasing revenues, we expect net income to come in at about $0.04 to $0.05 per share in the third quarter with full year earnings now expected in the range of $0.14 to $0.16 per share.

Turning our attention briefly to our balance sheet and cash flow, we continue to maintain a strong liquidity position. The Company's cash and short-term investments were 71.5 million, and working capital was 74.8 million at June 30, 2005. Cash flow from operations was positive at 4.3 million for the second quarter, an improvement of approximately 2.5 million over the second quarter of 2004. Capital expenditures in the second quarter amounted to 370,000, and licensed payments were $300,000. Depreciation and amortization amounted to $600,000 for the quarter. Our Accounts Receivable days sales outstanding declined from 50 days at March 31, 2005 to 46 days at June 30, 2005.

With that, I would now like to turn it back over to Doug.

Thanks, Ron. The final area I will address is an update on the progress made during the second quarter against our strategic objectives focused on the extension of our base business, further growth in the area of infectious disease point-of-care testing, and the development of new over-the-counter opportunities.

In our efforts to extend our base business, we have made significant progress. We recently signed a distribution agreement with SSL International to distribute an over-the-counter cryosurgical wart remover product in the European Union, Australia and New Zealand. The market in Europe historically has been dominated by salicylic acid treatments and with faster more effective treatments like Cryosurgery procedures available primarily in clinics and doctors' offices. We believe there is a good opportunity for an over-the-counter Cryosurgery product. Our product will be sold under the Dr. Scholl's brand which SSL has rights to outside of the Americas. We have been finalizing product labeling, and we're still on target to launch this fall.

We continue to make excellent progress in our efforts to obtain a CE Mark, the required regulatory approval to begin selling OraQuick ADVANCE in the European Union. Our expectation is to have OraQuick ADVANCE CE Marked yet this summer. We will then need to obtain necessary country specific registrations, and we still hope to launch OraQuick ADVANCE in Europe later this year.

We have completed our review of the market, and we have narrowed the list of potential marketing and distribution partners for this opportunity. We will continue to negotiate and evaluate these partners with a view to entering into negotiations later in the third quarter.

We also continue to make progress in identifying new distributors for our products in other foreign territories. We signed a new distributor for OraQuick ADVANCE in the Caribbean, and we are actively pursuing a new distributor for Histofreezer in Mexico. Discussions are continuing for both OraQuick and Histofreezer in Japan, and we have started initial discussions with a potential distributor for OraQuick in China.

Turning to the expansion of our infectious disease point-of-care testing business, we have been making good progress in the development of a rapid test for hepatitis C. Early clinical results for both a blood and oral fluid test are encouraging. We still have work to do to optimize this test, but I would say that this project is progressing largely as expected.

As you also now know, earlier today we announced the execution of a license for HCV patents held by Ortho-Clinical Diagnostics and Chiron Corporation. This has been in the works for some time, and we're certainly glad to have this agreement in place.

Concurrently with the license, we have also signed a long-term supply agreement with Chiron for the supply of HCV antigens and peptides that we intend to use in our HCV tests.

Another area where progress has been made is in our efforts to build an over-the-counter diagnostics business. As we have communicated in prior calls, the most immediate of these opportunities is to determine the pathway to selling our OraQuick ADVANCE HIV test over-the-counter. We have completed a significant amount of market research which confirms the attractiveness of this opportunity. In order to better understand the regulatory pathway to launch, we met with the FDA in June and discussions with the agency are ongoing. We are continuing to work with the FDA on a number of areas of interest such as the need for counseling, lay user studies and product labeling. More work is needed, and our interaction with the FDA has been very cooperative. We are very happy with the high level of interest and responsiveness demonstrated by the FDA.

As we previously discussed, cross functional teams also continued to work on this project and have made good progress, and although a lot of work still remains, this project is moving forward nicely.

One final piece to update is the area of operational improvements. As previously stated, the second quarter saw significant progress towards automating and increasing production of our numerous products. We have finalized or are nearing finalization of contracts to manufacture our planned European OTC cryosurgical product in the United States. This will lay the foundation for 2007 when we expect to move all over-the-counter cryosurgical products manufacturing to the U.S.

We achieved record production levels for our OraQuick, Intercept and OraSure products. In fact, our average monthly OraQuick production doubled during the second quarter.

And finally, a cross functional team has been working on the implementation of an Enterprise resource software system for the Company. We expect this project to move forward in the second half of the year. This would represent a major step in preparing our Company for future growth.

So in conclusion the second quarter was outstanding and represents yet another step forward toward a successful rest of 2005. I remain extremely optimistic and enthusiastic about the growth opportunities across our different product lines in all geographies, and I am also very confident in our ability to deliver against our stated objectives. We remain committed to delivering a very successful 2005 for our stockholders.

And with that, I would like to open the floor for questions.

(OPERATOR INSTRUCTIONS). Bill Quirk, RBC Capital Markets.

Congratulations on a very strong quarter, again. The first question, I just wanted to hone in, Doug, on a couple comments you made concerning increasing testing on pregnant women here in the U.S. I guess we always operated on the assumption that the U.S. had been kind of moving in this direction for several years. Maybe you could give us a little background on kind of where the opportunity lies here? I guess we would assume that the majority of women are already being tested. Maybe that is the wrong assumption.

Certainly moving in that direction, and I think the results, the improvement in reduction and vertical transmission of HIV from mother to infant over the last few years is showing up in the numbers.

That being said, not all states have adopted routine testing as a matter of policy. And you know we use that as just one example of the numerous initiatives that are being sponsored either at the state, local or now even at the government level to encourage more routine testing. And this is starting -- we are eagerly looking forward to this webcast that the CDC is sponsoring in November that is going to focus on routine testing and health care settings for adults, adolescents and pregnant women. We think this is just going to continue to fuel the demand for rapid HIV testing and the oral fluid application.

I see. A couple of questions on the hepatitis C license if I may. First off, how much is the upfront payment, and then secondly what is the timing for the commercialization here?

Yes, we have not disclosed the terms of the deal relative to any payments. But the time for development -- I think I have mentioned this in the past -- is typically two to three years for a product like this. This will be a PMA, and there will be some extensive clinical trials. But we began development of the product a couple of months ago, and we would expect in two to three years we would hope to have license here.

Okay, got it. And then just a quick follow-up and I will jump back into the queue. It may be too early to talk about what the distribution channel looks like here, but would it be safe to assume that you're going to be using your direct sales force to be selling this, and then should we be looking at some type of partnership here as well?

It is probably premature to make a call on that right now, but one of the attractive aspects of HCV testing, rapid testing, a number of people who are infected with HIV are also co-infected with HCV. So we are going to be talking about it -- a lot of the same population, certainly the same types of customers, whether it is hospitals or the public health market, so we will certainly be considering similar channels to what we are using with HIV today.

Sara Michelmore, SG Cowen.

I guess just wondering on the Freeze Off and the I guess that cryosurgical systems business in general, it is a little bit weaker than I thought. And then the outlook for Q3, which I thought was a seasonally strong quarter, was a low bit lower than I thought. So could you just talk about what is going on there, and if there is any impact from competitive issues that we should be thinking about?

Sure. Well, the Cryosurgery business that we are forecasting for the third quarter of 2005 actually in total is up over the second quarter of 2005. We are looking at something in the neighborhood of about 5.4 million versus Q2 that came in at 4.3. We expect a strong showing in the U.S. professional marketplace. We do see that the Cryosurgery business in the OTC space here in the U.S. looks to be down, but we also have in that quarter a launch estimated for the Canadian OTC opportunity with Medtech. Plus we begin rolling out the SSL unit order to supply them for product for their launch in the fall over in Europe. So actually we are expecting the cyro business to be up for the third quarter here approximately 1.2 million.

Okay, that is helpful. And on the SAMHSA order for OraQuick, is there any chance that they would reorder once you guys fill that order?

The order that we're filling right now was I believe it was placed sometime during the fourth quarter of 2004, and that was to be delivered in 2005. When SAMHSA awarded this agreement and announced the program, it was announced as a three-year program, and so we would expect to receive additional orders from SAMHSA for the subsequent years.

Okay, fantastic. And then on the gross margin, Ron, obviously a really strong organic gross margin performance. Your guidance for the back half of the year suggests that you're not assuming that you maintain that type of level going forward. So I was just wondering if you could comment on that and maybe if there is opportunity to get some upside if you're able to sustain that level of gross margin?

I frankly don't recall that we have really necessarily guided to what our second half of the year gross margin would be. But I think we have stated previously that we truly want to optimize the margin through the utilization of our manufacturing capacity here at the Company. And you know I think we're going to continue to make strides in that area as we build production volume going through the Bethlehem facility.

Hello?

Yes, I'm done with my questions. Thank you.

Ryan Rauch, Jefferies & Co.

Congratulations on a great quarter. Just two or three quick ones. When we look at your guidance, Ron, I mean as we all tend to look at EPS growth from the current quarter and going forward from a continuing operations basis, I mean this is based on your GAAP EPS performance, the $0.02 increase. Is it fair that from a continuing operations perspective you actually -- your guidance would be $0.04 higher?

I mean it includes the $1.5 million charge with Drager, correct? So if we took that out, the appropriate way to look at it would be $0.18 to $0.20, not $0.14 to $0.16, is that fair?

Well, that is fair if you strip out the UPLink piece of it, but we actually took that as a reserve that would fall into our as reported EPS for GAAP purposes. So that is how we constructed and put our gardens out for taking it up to $0.14 to $0.16.

But you're absolutely right. The impact of that charge represents approximately $0.03 in EPS that we took and were able to cover in the second quarter here and decreased the guidance for the year by $0.03. So I think that again is reflective of the kind of powerful earnings leverage that we have here in the Company based on continuing revenue build.

Okay. Great. And then from a annual revenue perspective, maybe I missed it, are you still comfortable with sort of I think that 70 million range give or take? Your third-quarter guidance I think would imply that you are, but are you still comfortable in that general thinking?

Yes, we are still comfortable with the 70 million number.

And that number does not include European ADVANCE among some other things. Is that an appropriate statement?

It does not include sales of OraQuick into the EU, that is correct.

Okay. And then, Ron, on the Drager side, you did take the 1.5 million reserve. Would you care -- I mean I know I have guessed and others have guessed for about a year and a half how much this cost you annually. Would you care to give us the level of accretiveness of that going forward just roughly? Will that save you about $1 million on the bottom line, or is that way too high or low?

That is a difficult call to make. It would have been dependent upon the volume that we put through. Obviously we into the business hoping that we were going to have substantial volume which would have driven the bottom line here. But I think it is safe to say that there was a drag on earnings based on this, and that part of the ability for us to step up our guidance a bit is reflective of the elimination of that product line.

Okay. And then finally, maybe it's just my interpretation, Doug, but it seems you were more optimistic on this call than in the past for the potential inclusion of oral-based testing when SAMHSA comes out with their revised guidelines. A), when do you expect these guidelines, and B), I know you said you met with them or something like that; can you just walk us through, or if I'm correct or not, with your level of optimism or confidence that you will be included in SAMHSA's revised guidelines, or when do you expect those?

As I mentioned in the call, there was a Drug Testing Advisory Board meeting that we presented at, as well as a number of Intercept customers and people real familiar with oral fluid who presented the argument for oral fluid as a rock solid proven alternative to urine-based drug testing, and the response from the committee at that time was encouraging.

When are they going to make a final recommendation on this? You know it is supposed to come I think at the end of 2004. Then it was revised to come out sometime midyear this year. I'm not going to get in the business of predicting when they are going to make a recommendation. But the fact is, oral fluid drug testing continues to be a great alternative to urine. The accuracy is well proven and published, and so we remain confident based on the feedback from that review that they will make a recommendation to support it.

Sounds good. Congratulations, again. Have a good evening.

Aaron Lindberg, William Smith.

First question is, what do you believe the market size is domestically for HCV testing, and how do you believe it is segmented between the hospital, physician office, lab and public health?

I believe, and I have to go back on the data on this, but I think there's approximately 60 million HCV tests performed in the United States. But the bulk of those are done in the blood transfusions marketplace. And so the segmentation on that is -- is beyond that is difficult for me to comment on right now.

Globally there's an estimated 170 million persons infected with HCV, and approximately 3 to 4 million people are newly infected each year, so you know it's a chronic infection. These numbers continue to grow. We believe there is a big market here domestically as well as throughout the world. As people progress through the disease, there is effective therapies available as well.

Can you give any specifics regarding just R&D focus or strategies as it relates to the OraQuick platform beyond HCV, multiplexing infectious diseases, other individual STD tests, things like that?

For competitive purposes, I don't want to get into the specifics of exactly what we are hot on right now, but we have looked at a number of different infectious diseases. We have looked at those that are applicable to the OraQuick testing platform and we are evaluating those.

There's also a number of infectious diseases that probably are not so suitable for the OraQuick platform, and to that end we are looking outside at other technologies, other platforms that we can either license in, acquire, maybe there's some products there available we can acquire or even some companies. So we are not looking to develop everything internally. We are also looking outside to build out that infectious disease rapid point of care business, and we think there is some opportunity there.

Any progress on an RSV assay?

No comment on that right now. We're not currently developing an RSV test.

The last question on manufacturing, can you give us the same details you did on OraQuick manufacturing as it relates to Intercept? Is the timing similar as far as the automation?

Well, the Intercept and OraSure we automated both those processes over the last quarter or so.

Intercept is fully automated at this point? And then the OraQuick will be early 2006?

That is our hope. Now depending on production volumes, we may still maintain some of our semiautomated processes here. Obviously everything depends on how this business continues to ramp.

Okay. So right now you're running a semiautomated OraQuick on two shifts and then a fully automated Intercept on two shifts? Is that about right?

The Intercept is not fully on two shifts, but it into a second shift.

Wade King, Montgomery & Co.

First, two clarifications, please. Just to the question previously about the three-year program at SAMHSA, so your expectation, Doug, is that well, you are 50% into filling the order placed late last year. You would expect this order level we have seen to be repeated on an annual basis for the next couple of years?

That is our expectation.

Okay. And are the pricing parameters here locked in for three years, and are they all focused on obviously the ADVANCE as opposed to any prior products?

It's all focused on ADVANCE, and we're selling at the government price line.

Okay. You know, I have asked this question in the past, and I will ask it again if you don't mind. Could you just make some macro comments please as it relates to what you expect per the CDC's purchasing patterns related to supplying public health departments selectively with the ADVANCE versus the public health institutions certainly in the larger states -- California, New York, Texas, etc., you know ordering the product on their own. The CDC helped to cede the interest and establish a precedent for the use of this device in public health facilities. At what point do we see the public health departments truly take off on their own and the CDC impact at least as it relates to the public health efforts become more history?

I think you have characterized it properly. The CDC has done a phenomenal job of ceding those states and those local programs that previously might not have started testing in the past, and I believe that they are going to continue to do that.

At the same time, we are already seeing those states ramp up substantially and take the direct purchase on their own shoulders. And, Ron, you may may want to comment on the level of our direct purchases, but our direct purchases now out of the states are actually higher than the CDC government purchases.

Right, that is correct. I mean just in the second quarter alone we did 2.2 million in direct. But you would have to combine both the SAMHSA and CDC businesses to get into the neighborhood of something in excess of the direct sales. They came in at 2.6 million combined. We actually believe that the direct will exceed that in the third quarter.

So the impact of CDC orders going forward may be less significant in the past, except possibly as relates to establishing precedent for use of the device in certain international markets, etc. that they purchase for?

Well, I think that all depends on where some of these policies and testing initiatives recommendations hit. That is why we're so enthusiastic looking forward to this November conference. Clearly out of the recent publications in the New England Journal, which highlight the cost-effectiveness of routine screening for HIV in health care settings, even in settings where there is a low prevalence of less than 1%, rapid HIV screening has been said to be very cost-effective.

So, you know, we think that clearly it is important that people understand their status. That most of the new infections are being driven by people who don't understand their status. There's an easy and cost-effective way for people to be tested as a part of the routine continuum of care. The Cook County study shows that that can be effectively executed in the emergency room. And to the extent this becomes adopted broadly across our country or even beyond our country's borders, this would represent a huge market opportunity, number one. But number two, I think it would go along way towards helping reduce the spread of this horrible disease, and that is what we are all about.

Okay. And one more clarification, please. I think this one is for Ron. Ron, to follow-up on the prior question per gross margin expectations in the second half, I mean if you could take (inaudible) the 70 million is a comfortable annual revenue figure and you freeze the bottom-line guidance somewhat here, I presume -- and, of course, the percentage of revenue has shifted here to infectious disease testing, which is higher margin for the Company given some of your distribution sales in cryo. I presume that the gross margin performance that you have seen recently, it may not be that high through the second half, but certainly you expect to be in the low 60s henceforth. Is that correct?

I think that that is a reasonable expectation. Yes.

You are not going to care to be more specific in that regard? I mean once again you went up 350 basis points sequentially here. So certainly a continuation of the superior margin performance is a reasonable expectation unless there is some major shift in the breakout of revenue and infectious disease?

Right. And that is it. It is really all about mix. It is all about potential currency exposure on the Euro against for the product that we purchase overseas. It is scrap levels, and you know we certainly are absolutely committed and driven to drive the gross margin as high as possible. But to give you a point estimate of what that might be, you know I think is probably not the prudent thing to do at the moment. But we certainly are committed to driving higher.

That is why they pay you the big bucks, right, Ron?

Thanks.

Mark Atallonti (ph), Alliance Capital.

Good afternoon, everyone. A couple of questions. So Lowe's signed on. Are there other large companies that you know of that are in beta testing, and how many large employers right now use the rapid Intercept?

I cannot answer that off top of my head.

Okay.

Now relative to other large employers, we are regularly on a rolling basis targeting large customers for conversion, and we work with our laboratory partners to identify those large employers whose existing drug testing contracts might be coming up for renewal who are currently using urine and working with them well in advance. So we constantly have a stable potential target that we're looking to convert.

How much cash was on the balance sheet at the end of the quarter? I missed that.

It is 71.5 million.

And are there acquisitions -- are there other licenses you're seeking, or would you consider reducing the share count, or what is the use of cash?

Well, we will be using some of the cash for the most recently announced licensing deal that we just cut with Chiron for -- you have the Titus C (ph) IP. We are also looking at additional products and/or technologies opportunistically to augment the growth that we're experiencing here organically in the business. We have looked at opportunities. We have passed on some, but we continue to committedly look at opportunities out there in the marketplace in infectious disease and potentially in the substance abuse area.

And in terms of federally funded global initiatives or where the government would pay for rapid testing done outside the U.S., where does that stand, and how are their attempts at gaining funding that way going?

We're very active in that space right now. Clearly having our product now registered on the WHO approved list makes that a bit easier to access those funds, and then it is just depends on whether we are dealing within the PEPFAR or President's Emergency Plan stable of companies. That is the 15 companies, 13 -- excuse me, countries -- 13 in Africa, Vietnam and Haiti -- that are eligible to receive funds out of PEPFAR. The Global Fund provides monies to about 130 different countries, and both of them operate through different coordinating mechanisms who apply to the organizations for funding.

So we have prioritized those. We are actively engaged both at the global level, as well as now in country working with the ambassadors, the AIDS directors and the ministers of health. So it is obviously my explanation explains it. It is bureaucratic, it is difficult, and I think we're making some progress.

Yes, that has always been the elusive revenue with the Company I guess. But is that an '05 possibility, or is it an '06 possibility? I thought the President talked about funding you know testing or treating or a global program. When is that going to happen?

I think the answer is yes and yes, but it is upside. We have not put it into any of our numbers.

The allotted time for the call is up. We apologize to those who are still holding to ask a question. I will now turn the call over to Doug Michels for closing remarks.

Okay. I just want to once again thank everybody for coming on the call this afternoon. We had a great quarter. We look forward to delivering the year, and I appreciate your continued interest and support. Have a good night.

This concludes today's 2005 second-quarter financial results. You may now disconnect.